Written by: Joshua R. Kotter
Attorney review: Joshua R. Kotter
Jurisdiction: Federal estate-tax law; state business, estate-planning, and insurance law may also apply
Last reviewed: September 4, 2026
Next review: March 4, 2027, or sooner if controlling law or guidance changes
Life-insurance-funded buy-sell agreements remain useful succession tools, but the identity of the policy owner and beneficiary can materially affect the federal estate-tax valuation of a deceased owner’s shares. In Connelly v. United States, 602 U.S. 257 (2024), the Supreme Court held that the corporation’s contractual duty to redeem a deceased shareholder’s stock did not offset life-insurance proceeds paid to the corporation when the shares were valued for federal estate-tax purposes.
What happened in Connelly
Brothers Michael and Thomas Connelly were the only shareholders of Crown C Supply. Michael owned 77.18 percent of the company; Thomas owned the remaining 22.82 percent. Their agreement gave the surviving brother an option to purchase the deceased brother’s shares. If the surviving brother declined, the corporation was required to redeem them. Crown purchased $3.5 million of life insurance on each brother to fund a possible redemption.
After Michael died, Thomas declined to purchase the shares. Crown and Michael’s son agreed on a $3 million redemption price, and Crown used $3 million of insurance proceeds to pay the estate. The estate reported the shares at $3 million. During the Internal Revenue Service audit, an appraisal valued Crown at $3.86 million without counting the $3 million of insurance proceeds used in the redemption. The IRS counted those proceeds, valued Crown at $6.86 million, valued Michael’s interest at approximately $5.3 million, and assessed an additional $889,914 in estate tax.
The Supreme Court’s narrow holding
The Court unanimously affirmed the government. For federal estate-tax purposes, property is generally valued at fair market value as of the decedent’s death. Life-insurance proceeds payable to a corporation are an asset of the corporation. The question was whether Crown’s obligation to redeem Michael’s shares at fair market value should be treated as an offsetting liability.
The Court said no on the facts before it. A redemption at fair market value exchanges the shareholder’s interest for an equivalent payment. It reduces the company’s assets and the number of outstanding shares at the same time; it does not, by itself, reduce the economic value of the shareholder’s interest immediately before redemption. A hypothetical buyer evaluating Michael’s 77.18 percent interest at the moment of death would take account of the $3 million in insurance proceeds held by Crown.
The decision did not announce that every redemption obligation is irrelevant to value. The Court expressly left room for circumstances in which satisfying a redemption obligation could reduce the company’s value—for example, if the company had to liquidate operating assets and impair future earning capacity. The holding is therefore important but fact-specific: a fair-market-value redemption obligation was not automatically a liability that canceled corporate-owned insurance proceeds.
Why the structure of the buy-sell agreement matters
A buy-sell plan answers several different questions: who will buy the interest, who will own and pay for insurance, how the purchase price will be set, what happens if insurance is insufficient, and how the parties will handle administration after death or disability. A document can operate correctly as a contract and still produce a tax or valuation result the owners did not expect.
A redemption agreement and a cross-purchase agreement allocate those roles differently. In a redemption arrangement, the company generally buys the departing owner’s interest and may own insurance used for that purchase. In a cross-purchase arrangement, one or more owners generally buy the departing owner’s interest and may own insurance on one another. The Supreme Court identified cross-purchase planning as one possible alternative in Connelly, but it also noted practical drawbacks. No structure is automatically best. The number of owners, premium obligations, basis consequences, transfer restrictions, creditor issues, governance, and the company’s need for liquidity all matter.
Questions closely held businesses should review
Owners should begin with the actual agreement and the actual insurance—not a summary made years ago. Confirm the owner and beneficiary of each policy, the insured person, current death benefit, premium responsibility, and any collateral assignment. Compare those facts with the agreement’s purchase obligation, valuation language, triggering events, notice provisions, and closing mechanics.
Valuation language deserves particular attention. A fixed price that has not been updated may no longer reflect the business. A formula may omit important assets, liabilities, discounts, or changes in the company’s economics. An appraisal mechanism may fail if the agreement does not say who selects the appraiser, which valuation date and standard apply, or what happens when the parties disagree. Federal tax law can also limit when an agreement controls estate-tax value.
Insurance adequacy should be stress-tested rather than assumed. The policy proceeds may be below the purchase price, may arrive later than expected, or may increase corporate value for estate-tax purposes. The company may also need cash for operations, debt covenants, payroll, or transition expenses at the same time it must fund a redemption.
A practical review sequence after Connelly
First, inventory the owners, ownership percentages, governing documents, buy-sell terms, insurance policies, beneficiary designations, and related estate-planning documents. Second, obtain a current business valuation or a defensible valuation process appropriate to the company. Third, model how the arrangement works immediately before and after each triggering event, including the path of insurance proceeds and the effect on the remaining owners. Fourth, coordinate business counsel, estate-planning counsel, tax advisers, valuation professionals, and insurance professionals so that each assumption is visible to the whole team. Finally, create a scheduled review process and a review trigger for major changes in ownership, enterprise value, family circumstances, tax law, or insurance.
The lesson is not that corporate-owned life insurance or redemption agreements should never be used. It is that succession planning must be evaluated as a connected system. Ownership, contract terms, valuation, insurance, tax treatment, liquidity, and administration should point toward the same intended result.
Official sources and further reading
- Supreme Court of the United States, Connelly v. United States, 602 U.S. 257 (2024)
- Internal Revenue Service — Frequently Asked Questions on Estate Taxes
- 26 C.F.R. § 20.2031-2, valuation of stocks and bonds
Legal-information notice: This article provides general information and does not provide legal, tax, accounting, valuation, or insurance advice. The correct structure depends on the governing documents, parties, assets, objectives, jurisdictions, and current law. Reading this article or contacting the firm does not create an attorney-client relationship.
This archived article provides general information and may not reflect later changes in law or procedure. It is not legal advice. Contact the firm for an evaluation of a specific matter.
